Profits are secondary

What resources can help a company through the growing period when profits are secondary? “Low-profit” limited liability corporation, or L3C, a new class of for-profit entities, where the primary goal is not making money but dealing with a social issue. (Check it out on CNN Money.)

It’s a controversial new type of business entity intended to make it easier for companies with a social mission to receive investments, including loans and grants, from charitable foundations, where the primary goal is not making money. Since April 2008, five states and two Indian tribes have signed legislation that enable a business to incorporate as an L3C, and at least five additional states are considering similar laws. In Vermont alone, which was the first U.S. state to pass the legislation, more than 80 companies have incorporated as L3Cs in the past 21 months. According to Robert Lang, one of the creators of the L3C concept, the main goal is “to create an LLC whose very DNA insists that it has to put its beneficial activities in front of making money.”

L3C legislation is pending in Georgia, Illinois, Missouri, Montana, North Carolina, North Dakota, Oregon, Tennessee, Washington, and Utah. The Huffington Post (Feb. 9, 2009) reported that legislatures in Georgia, Montana, North Carolina and Oregon are expected to pass L3C legislation this year.

The IRS will decide if it will recognize L3Cs as automatically eligible for program-related investments. If it won’t, then the L3C designation may be redundant.

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One response to “Profits are secondary”

Check our website for a lot more information. The last paragraph above is simply not true. Since the L2C is a form of business organization it cannot be redundant. In addition the IRS has already recognized LLCs of which the L3C is a variant form as suitable for PRIs. The IRS does not have the power to independently grant automatic status to any form. That will take either a Treasury ruling or more likely a new federal law which we are working on. However, the IRS does not now have to rule on a PRI before it is made and has not had to since PRIs became law in 1969. Some foundation choose to ask the IRS for private letter ruling but many do not. There are excellent guidelines in the tax code. Since the L3C is a templated form use should make everyone more comfortable.